FTC May Block Whole Foods From Buying Wild Oats

When the Whole Foods acquisition of Wild Oats was announced, we analyzed the anti-trust implications:

Probably the most common question the Pundit has been asked is whether anti-trust authorities will allow the acquisition.

They should, but much depends on how you define “the competition.” If you believe there is a separate category of, say, “health food supermarkets,” then the FTC would be hesitant to approve. Wild Oats is the best shot at being a true competitor to Whole Foods, and allowing them to merge would be seen as anti-competitive.

A more reasonable view of the market, though, is that Whole Foods is part of a larger food retailing industry and in that industry it has an insignificant market share.

Now, however, providing the not shocking evidence that government antitrust attorneys don’t understand the food business, comes word that the government will try to block the merger:

Federal regulators, looking to thwart a merger that would create a colossus in the U.S. organic supermarket business, will try to block Whole Foods Market Inc.’s (WFMI) planned acquisition of rival Wild Oats Markets Inc. (OATS), the companies said Tuesday.

Whole Foods, of Austin, Texas, which in February agreed to buy Wild Oats in a $565 million deal to create the nation’s largest organic grocery chain, said it expects the Federal Trade Commission to file a federal lawsuit requesting an injunction to stop the merger. In March, Whole Foods said FTC officials had raised concerns about “perceived anticompetitive effects” resulting from the deal.

Shares of Whole Foods fell $1.21, or 2.9%, to $40.48. A thwarted merger would deprive Whole Foods of sales and profits the Wild Oats stores are expected to contribute over the next few years, leaving Whole Foods to rely on a more costly store-building program. Meanwhile, shares of Wild Oats rose amid speculation the chain might find a new suitor.

Whole Foods said it plans to vigorously challenge the government’s opposition in federal court. Legal analysts said the outcome likely will hinge on the court’s interpretation of which market the companies operate in — the natural — foods market or the broader supermarket industry.

“The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic and fresh products,” Whole Foods Chairman and Chief Executive John Mackey said in a written statement.

The FTC confirmed it will seek to block the deal. Lawyers close to the investigation confirmed the companies’ statements and said the agency is preparing to file a complaint in U.S. court as soon as Wednesday.

The agency’s opposition is based on the argument that there is a separate market segment for organic-foods chains and that in many cities the deal would lessen competition in that segment, leading to higher prices.

The flaw in the government’s reasoning is that it thinks there is an “organic supermarket business,” when, in fact, this is better understood as a marketing emphasis.

The products sold at a Whole Foods or a Wild Oats are sold in supermarkets, supercenters, warehouse clubs, via the Internet and many other outlets.

And in any case, the barriers to entry in opening these types of stores are quite low — Publix is going to do it with its Greenwise concept, Supervalu did it with Sunflower, and if the demand is there others will do it as well.

The FTC is either pandering to those instinctively anti “big business” or doesn’t get the realities of today’s marketplace.

Of course, there also is the possibility that Whole Foods should be careful about what it is wishing for. Our sense is that Wild Oats, with its mostly smaller stores, is not the future but the past for Whole Foods.

The Whole Foods prototype store in Austin, as well as new stores such as the one in Los Angeles or, especially, the new 80,000-square-foot store in London, are not so much retail stores as restaurants and spas that sell some products at retail.

The truth is this focus might pay off more than expanding its small store base. If the FTC wins and Whole Foods can’t buy Wild Oats, though we’ve never thought the vibe at Whole Foods was particularly “country” with its Texas headquarters, maybe Whole Foods’ executives might start humming that old Garth Brooks song about giving thanks for Unanswered Prayers.